Skip to 0 minutes and 8 secondsLet’s look at how our knowledge of demand is helping us understand the airline case study.
Skip to 0 minutes and 14 secondsWe have three bits of information about demand for our airline’s flight: At €400 we had 120 customers
Skip to 0 minutes and 22 secondsDecreasing the price to €250 gave us 200 customers Increasing the price to €550 gave us 100 customers.
Skip to 0 minutes and 34 secondsWe can plot this information on a quantity–price graph, compute the revenue for each price and visualise it.
Skip to 0 minutes and 40 secondsThe revenue is simply the rectangle with a base equal to the number of passengers and a height equal to the price.
Skip to 0 minutes and 50 secondsFor the first situation, we have a blue point on the demand curve. And the revenue at a ticket price of €400 is the blue rectangle here. It amounts to €48 000.
Skip to 1 minute and 3 secondsWe can compare it to this other rectangle, defined from the green point, which is the revenue obtained with a ticket price of €250.
Skip to 1 minute and 13 secondsIt amounts to €50 000.
Skip to 1 minute and 18 secondsWe can also compare it to the revenue when the ticket price was set to €550, which is €55 000.
Skip to 1 minute and 26 secondsSo we have a straightforward representation of the revenues with these rectangles. But, from these 3 points, we can also see, or imagine, what the demand curve looks like.
Skip to 1 minute and 39 secondsWe can see that a uniform pricing strategy is not optimal – whatever the price, there is room for increasing the revenue. If the price is set higher than €250, the plane may not be filled and money is left on the table.
Skip to 1 minute and 57 secondsOn the other hand, the revenue is not optimal at the lower price either
Skip to 2 minutes and 3 secondsWe have seen that setting different prices for different people could lead to larger revenue, and this is how we can visualise this situation. The revenue of this flight is now composed of these three rectangles. The prices vary from €550 down to €250, which is low enough to fill the plane and avoid leaving empty seats. There is, of course, some overlapping of these rectangles, since some of the passengers ready to pay €250 were also ready to pay €400 or even €550, and they should not be counted twice. The best way to see the final revenue is by looking at the demand curve and the area underneath each price.
Skip to 2 minutes and 54 secondsWe see that the closer we are to the demand curve, the higher the revenue.
Skip to 3 minutes and 0 secondsSo, ‘know your demand’ is one of the main rules of revenue management, and this is why so many firms spend a lot of time and money collecting and analysing data on their past activities.
Skip to 3 minutes and 14 secondsLet’s talk briefly about supply. Here, we are in a monopoly situation, there is only one flight and one company, so supply is defined by the capacity offered and that capacity is fixed, at least in the short term. So, the company has only one tool to increase its revenue, and that is a clever set of prices. Of course, those prices should match the demand curve. We could even imagine a situation where there are several further price points and that would generate even more revenue. But separating people into groups, according to their willingness to pay, is not an easy task…
Case study follow up: pricing strategy and the demand curve
Setting different prices for different people could lead to larger revenues.
But what is really going on? Thanks to the demand curve, we can visualise each outcome in the airline case study. We can then visually compare the revenue of each pricing situation proposed in the airline case study.
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What have you learned so far about how the demand curve works?
© By ENAC - Christophe Bontemps CC BY-NC-SA 3.0